Securing small business loans and grants is notoriously difficult, especially for new start-ups. As you may already know, the success of your application rests on your business plan, your credit, and your existing assets, among other details. Your personal finance can also play a part if you own a sole proprietorship.
Most small business owners are aware of the challenges they’ll face when they apply for a small business loan. However, it comes as a surprise to many that location plays a part. When coming up with a business concept, a lot is depending on the “how” and “when” but not always the “where.”
Choosing a location for your business is a strategic decision that will affect your sustainability and potential for growth. It will also affect your small business financing, so it is not a choice to make lightly.
Starting a Small Business: Why Does Location Matter?
The location of your business should be a key part of your business plan for a number of reasons. Not only will your success depend on the market you’re selling in, but how you deliver your products.
If your target customers are based in New York, for instance, you’d want to start a business in a state where you could easily ship and advertise there. Likewise, if you’re starting a bricks-and-mortar company, you need to know what you can rely on local trade or heavy tourist footfall.
Location is also important because it determines the tax, zoning laws and regulations your business will be subject to. This is where specifics are important. It’s not enough to say you want to start a business in California, for example. You need to make a strategic decision about which state, city, and neighborhood you plan to do business in.
How Business Location Affects Financing
When applying for business loans, you will be asked to specify where you want to be registered. You will need to choose a location to register your business so that you can access the right licenses and permits, as well as the correct corporation or personal tax. This applies whether you are an online or offline business.
In addition to corporate tax laws and regulations, you will also need to consider the benefits and restrictions of different government agencies. Some governments offer funding to start-ups and small businesses, while others offer business loans for women and grants for under-represented or minority groups. Those operating in the healthcare or life science sectors may also be entitled to research funding, depending on where they are registered.
Funding for Small Businesses
When starting a small business, chances are you will need some sort of funding. Some small businesses apply for business loans from the bank, while others turn to private investors. However, for some, these options won’t be suitable due to a lack of credit or personal assets, and this is where local and federal government incentives come in.
• Local government incentives
Some state and local governments offer local incentives in the forms of loans, grants and tax deductions for small businesses. You might also have access to state-specific small business loans depending on your location. Small Business Administration Loans (or SBA Loans) are available to most small businesses, as long as they pass the application process. To see if you are eligible for an SBA loan, you can visit your local SBA Offices or apply online.
• Federal government incentives
The federal government also offers finance to small businesses based in underutilized areas. You can visit the Historically Underutilized Business Zones (HUBZone) program to see if your business qualifies for access to federal procurement opportunities.
Business Taxes According to State
The financing of your small business will also rely on your local taxation laws. Most states implement some form of income tax for businesses, though how much depends on the business’s legal form and sector.
In most states, businesses who file under a corporation structure are subject to a corporate income tax. S corporations, limited liability companies (LLCs), partnerships, and sole proprietorships are usually subject to the state’s tax on personal income.
Rates for both corporation tax and personal income tax vary among states, but there are some facts to consider:
- Corporation rates vary between 4-8% depending on the state
- Personal income taxes vary according to income, but most range from 0-9%
- Corporate income tax is currently applicable in six states – Nevada, Ohio, South Dakota, Texas, and Washington. However, most of those states also have some form of gross receipts tax on corporations.
- Seven states – Nevada, South Dakota, Texas, Washington, Wyoming, Alaska, and Florida – currently have no personal income tax.
You will need to decide the tax landscape for your business (in line with its registration location) during the planning stages of your business. Rates vary, and many can be complicated to work out in advance. However, the amount you are taxed will depend on where and how your business is registered.
According to the SBA:
“Some states are well-known for creating tax environments that are very friendly to certain kinds of companies. That’s part of the reason why tech startups, financial institutions, and manufacturing tend to concentrate in certain areas of the country.”
The location of your business is not just important for sales and marketing reasons; it could also affect the way your small business receives finance. The location in which your business is registered (as well as its official legal structure) will determine the amount you are taxed, as well as your eligibility for small business funding, including government-issued loans and those backed by the SBA.
To ensure you’re making the right choice for your business, spend time researching your location and finding out about the differing tax laws. You may also wish to consult a financial advisor if you’re not sure where to register your business. Tax laws can be confusing, especially if you operate across different states. Therefore, it’s beneficial to have a small business accountant, so you don’t neglect your tax responsibilities or incur fines.
Deciding where to locate your business is an important decision to make, but don’t let that deter you. With the right planning, research and financial advice, you can come to a decision that allows your small business to grow and thrive.